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The new ‘normal’ isn’t all it’s cracked up to be

Jan 02, 2014

Corn futures at $7 per bushel; soybeans at $15. Those higher prices were supposed to be the new ‘normal’ in agriculture.

Obviously, corn isn’t selling at $7 now but some growers seem to be clinging to the idea that they could rebound and approach that area again, according to Dave Kohl, professor emeritus in Agricultural and Applied Economics at Virginia Tech University.

“I know a grower who has 100,000 bushels in the bin,” Dr. Kohl told participants at the USA Rice Outlook Conference in St. Louis. “He could have sold them at $7 a bushel last year. He’s still holding out at $4. And that’s called what? That’s called stubbornness and greed.

“The gentlemen who paid $21,000 an acre for farmland up in Iowa was in one of my sessions not long ago. He said ‘I would have bought another 1,000 acres if it was available’ because he said ‘They’re not making it anymore.’ Greed is alive and well in this Super Cycle, and she’s very, very dangerous.”

Kohl said farmers who attend the 200 or so presentations he makes annually are beginning to ask questions about interest rates and land values. “That anxiety actually is good because it makes you think.

“The other thing is we’re getting extremely complacent, particularly on the grain side. We’ve been in this super cycle for 10 years, and everyone says this is the new normal, the new plateau. No, no, no … it’s not. And one of the things I would tell you is that it’s the good times that get you into trouble.”

The higher prices have created a new sense of optimism in agriculture, a sense that Kohl calls refreshing. But it doesn’t mean farmers can ignore indicators that can help them chart the course for the next several years.

Another example: A young couple who started farming from scratch several years ago has amassed a net worth of $1.3 million. The farm next to them is up for sale.

“It’s interesting. At $7 corn and $15 soybeans, every one of the ratios a banker or Farm Credit looks at is a green light,” Kohl said. “But you go to $4 corn and single-digit beans two-thirds of the ratios are red light. We’re in an extremely fragile environment.”